Heidelberg Materials AG's (ETR:HEI) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Heidelberg Materials (ETR:HEI) has had a great run on the share market with its stock up by a significant 26% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Heidelberg Materials' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

We've discovered 1 warning sign about Heidelberg Materials. View them for free.

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Heidelberg Materials is:

9.4% = €1.9b ÷ €20b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.09 in profit.

View our latest analysis for Heidelberg Materials

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Heidelberg Materials' Earnings Growth And 9.4% ROE

To begin with, Heidelberg Materials seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 8.1%. This certainly adds some context to Heidelberg Materials' exceptional 38% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Heidelberg Materials' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.9%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Heidelberg Materials fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Heidelberg Materials Making Efficient Use Of Its Profits?

Heidelberg Materials' three-year median payout ratio is a pretty moderate 28%, meaning the company retains 72% of its income. So it seems that Heidelberg Materials is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Heidelberg Materials has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 29%. However, Heidelberg Materials' ROE is predicted to rise to 12% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy with Heidelberg Materials' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.